Is T3EX Global Holdings (TPE:2636) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies T3EX Global Holdings Corp. (TPE:2636) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for T3EX Global Holdings

What Is T3EX Global Holdings's Net Debt?

As you can see below, at the end of September 2020, T3EX Global Holdings had NT$2.03b of debt, up from NT$1.76b a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$2.68b in cash, so it actually has NT$646.9m net cash.

How Strong Is T3EX Global Holdings's Balance Sheet?

According to the last reported balance sheet, T3EX Global Holdings had liabilities of NT$3.49b due within 12 months, and liabilities of NT$523.2m due beyond 12 months. On the other hand, it had cash of NT$2.68b and NT$2.21b worth of receivables due within a year. So it can boast NT$870.8m more liquid assets than total liabilities.

It's good to see that T3EX Global Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that T3EX Global Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, T3EX Global Holdings grew its EBIT by 79% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine T3EX Global Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While T3EX Global Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, T3EX Global Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case T3EX Global Holdings has NT$646.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$574m, being 126% of its EBIT. When it comes to T3EX Global Holdings's debt, we sufficiently relaxed that our mind turns to the jacuzzi. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with T3EX Global Holdings .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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